At the end of 2010, the Office of the Commissioner of Insurance (the "Insurance Authority") issued a revised Guidance Note (GN6) for insurers on reserving for mortgage guarantee business (the "Guidance Note"). The major revisions were:
- requiring funds to be maintained in the Contingency Reserve ("CR") for 10 years instead of 7 years;
- increasing the CR required for direct non-standard mortgage guarantee business from 50% to 75% of the net earned premium income derived from such non-standard business in the year to be assigned to CR; and
- providing a definition of "direct non-standard mortgage guarantee business" for the purpose of the Guidance Note in part 11 (II)(e).
Remarks - As part of their solvency requirements, insurance companies are required to maintain adequate technical reserves for payment of future claims in relation to their insurance businesses. Such rules and regulations are established by the Insurance Authority, which regulates insurance companies and ensures their compliance with the solvency requirements. The strengthening of reserve requirements for mortgage guarantee business are the newest set of measures to be implemented in Hong Kong in response to the property market volatility - or more exactly, steeply rising prices and fears of a property bubble - over the past few months.
The Insurance Authority's circular and Guidance Note can be viewed HERE.